Based on the five-year capital market assumptions in its August 2021 report, UBS expects a sub-2% return in nominal terms for a traditional 60% equities and 40% bonds portfolios over the next five years. These extremely low expectations from public markets put investors in a quest for alternative solutions. Naji Nehme, Chief Investment Officer at Petiole Asset Management, shares his conviction in allocating to private markets.
Naji Nehme, you have 20 years of investment experience, with the first ten years in the public markets and the last ten years in the private markets. What gives you confidence in private markets investments today?
We believe that the combination of high public market valuations we are seeing and the potential for elevated market volatility, as central banks start a gradual normalization, will result in lower expected returns and higher risk for traditional or balanced portfolios.
By contrast, private markets as a long-term asset class have consistently offered a premium to the public markets. Over the last two decades, a portfolio invested in private markets consisting of private equity, real estate and private debt achieved double the returns of a similar 60/40 public markets portfolio at lower risk. We believe this outperformance will continue.
Despite the outperformance of private equity vs public equity over the past two decades, why do many investors still struggle with private markets investing?
Indeed, for the last 10 years, private equity surpassed public equity returns year-after-year with an average 4% net of all fees .
In spite of this, investors face challenges in adopting this asset class in their portfolio. Some of the reasons we often hear are:
High dispersion of returns between the different sponsors, making the selection process difficult and time consuming
Access to the top tier managers is limited to a few institutional investors with high minimums required
Fees are quite high as they are mostly charged on committed, not invested, capital
We recently published an ebooklet on this topic to invite investors to take a different investment perspective.
How is Petiole’s value proposition on point with these hurdles?
Our vision is to make private markets accessible. Through our track record spanning 17 years as part of The Family Office Co. (a multi-family office in the GCC) and our focus on private markets, we have established a platform that allows mid-sized investors to easily access and build their private markets portfolio in one holistic solution.
Our investment hubs in Zurich, New York and Hong Kong allow our specialized teams to identify and build relationships with the top-tier GPs, get a first look at transactions and vet them efficiently.
In addition, the major efforts we placed in technology through our digital ecosystem bring greater transparency to investors for what is still considered to be an opaque asset class.
Can you elaborate more on your last statement regarding technology?
More than a decade ago, we recognized early on the importance of having a highly experienced professional team that can respond to partner GPs quickly and reliably. In 2010, we digitized our investment strategy and workflow across the deal sourcing pipeline, due diligence and the investment committee decision process. We have continuously refined this process over the years and adapted to newer technologies. Over time, we integrated this with the control functions and our fund administrators.
Today, we are moving to an API-driven architecture where we will be able to connect seamlessly with external providers and leverage a richer data set for each asset class. We are also deploying bots in our operations team to improve efficiency and accuracy.
To address today’s investor’s needs, we launched the Petiole App, a digital interface that allows investors to be seamlessly onboarded, access at any time their portfolio performance, leverage our market insights, assess upcoming co-investment opportunities, and connect with our team directly when required.
How do you execute your investment strategy in your clients' portfolios?
Our investment strategy starts with a review on the private markets’ asset classes supported by data on macro indicators, valuations of liquid and illiquid asset classes, flows and sponsor views. This annual exercise set the long-term themes and the positioning of our multi-asset class private markets portfolio which is then translated into a portfolio construction aligned with client needs.
As an example of our current market positioning, within the private equity space, we are currently underweight Private Equity secondaries and overweight Private Equity directs. In the real estate asset class, in the U.S., we recently shifted the focus from office to suburban residential.
Can you share with us an important lesson you learned from investing in private markets?
There are three key factors for successful investing: invest for the long-term, select quality assets, and allow the compounding of returns to work in your favor.
My experience in the last 10 years taught me that by investing in private markets, we are forcing the compounding of returns to work in our favor i.e. targeting a steady return over time is safer than trying to hit high returns in the short term. Let time work for you rather than the reverse.
The original article was published in Finews, in German and in English, on September 27, 2021.